Whatever else happens, the days of customers driving several kilometres to the warehouse store on the edge of town are numbered.
By Ryan McGreal
Published April 09, 2006
I've written before about Wal-Mart's great economic advantage: not its vast purchasing power, use of sweatshop manufacturing labour, or predatory anti-union employment policy (although these certainly help to keep costs down), but its incredibly sophisticated logistical system.
Wal-Mart adapted the manufacturing industry's just in time (JIT) philosphy to its entire supply chain, eliminating warehousing costs and reducing inventory to a minimum. As you take the last package of widgets off the shelf, a truck is pulling into the loading dock to deliver three more. In a week, just as someone else takes the last package off the shelf again, another truck will pull in to replace them again.
The coordination involved in making this possible is incredible. Cash registers send purchase and return data to central processors in real time, and stock depletion curves calculate the best amount and frequency to deliveries to maintain a minimum amount of stock on the shelves.
The entire supply chain runs for ten thousand kilometres starting at the factory floor in China, and it's managed with a precision that competitors simply can't beat. That's Wal-Mart's real secret, and it's possible thanks to cheap, fast telecommunications and cheap, abundant petroleum.
Computers and data networks are getting faster, but oil production is at or near a global, historic peak. As demand strains against supply limits and the price of oil goes up, the competitive advantage of just in time logistics will steadily erode until the cost of frequent micro-deliveries to nearly five thousand stores around the world exceeds the cost of the more traditional factory-to-warehouse-to-retail organization.
At the same time, the big-box model replaces many small community stores with one large warehouse store. Instead of the company delivering goods to locations close to customers' homes, customers must leave their neighbourhoods and drive to the warehouse store. This effectively subsidizes the store: it no longer has to deliver its products close to its customers.
Amazingly, most of the cost and energy use of transportation is swallowed up in the final trip - from store to home. Shipping is very energy-cheap, and can get even cheaper with the use of sails (no kidding!), as is rail transport. However, the cumulative total of every customer taking a private vehicle to the store and back consumes tremendous amounts of fuel.
Looking at the whole system, offloading warehouse-to-neighbourhood costs to customers is a very inefficient method of distribution. The company wins by distributing its 'last mile' costs among a large pool of customers, but the total cost to those customers is much higher than it would be for the company to deliver the same goods to neighbourhood store.
As the cost of driving continues to rise, market pressure to provide locations closer to people's homes may eventually force a shift away from warehouses and back to smaller neighbourhood centres that customers can reach by walking or taking public transit.
Alternately, if both public transportation to what are now sprawling big box compounds and the physical layout of the compounds themselves improve significantly, they may be able to preserve their business model by adding delivery to their service. One large vehicle dropping goods off to a dozen homes is more efficient than a dozen individual cars driving up to the store and back.
It's possible Wal-Mart understands this. After a year of rising energy costs (and, ironically, being bumped out of the number one spot in the Fortune 500 by ExxonMobil), the company recently announced that it plans to push heavily into poor neighbourhoods and "create more opportunities for small businesses to capitalize on the benefits of having a Wal-Mart store in their community."
On the one hand, capital investment is exactly what poor areas lack, not to mention affordable goods, so the company's decision to spend money cleaning up contaminated brownfields sounds encouraging. On the other hand, the ongoing de-industrialization of North America by moving factory work offshore is a big part of why many neighbourhoods are so poor in the first place.
Also, the cynic in me contends, Wal-Mart is less likely to face organized community resistance from a poor neighbourhood that has limited resources and is desperate for any kind of investment.
It's far too early to write the big box industry off. These companies may yet find ways to reinvent themselves for a post-Peak economy. One thing is clear, however: the days of customers driving several kilometres to the warehouse store on the edge of town are numbered.